Statement to the Ministry of Finance: Proposal for a Council directive on tax simplification (Tax Omnibus)

To the Ministry of Finance
Reference number: VN/20150/2026

Service Sector Employers Palta welcomes the opportunity to comment on the European Commission’s proposal for a directive on tax simplification (Tax Omnibus) during the preparation of the Government communication to Parliament. Palta is also available for the subsequent stages of preparation.

Palta takes a positive view of the Commission’s objectives to streamline and simplify European tax regulation. According to the Commission’s impact assessment, the proposals in the Tax Omnibus directive would reduce compliance and financial costs by about 6.6 billion euros per year, out of which recurrent costs related to cutting down on administrative burden is 2 billion euros per year. This illustrates how burdensome the regulation is and how much of companies’ resources and funds are spent solely on complying with tax reporting and procedures.
 
A complex and overlapping regulatory framework has eroded taxpayers’ legal certainty: even if a company invests in systems, software tools, hires personnel and uses external consultants, it is difficult to be fully certain that everything has been done correctly. In early 2026, the Commission organised an open consultation on the Omnibus initiative. Palta welcomes the fact that companies’ comments are reflected in the proposal for a directive.

In cross-border situations, withholding taxation continues to cause significant administrative costs, cash-flow problems and legal uncertainty for companies. According to the Commission’s proposal, intra-EU dividend, interest and royalty payments would be exempt from withholding tax more broadly, and the exemption would no longer require a specific minimum shareholding. Palta supports the proposal. The change would reduce situations where tax is first withheld at source and only refunded to the company after a lengthy and burdensome administrative procedure. It is also welcome that Member States could not require prior approval or a separate administrative procedure to verify the conditions for exemption at the time of payment. From the perspective of companies, the problem with current advance procedures is often that they are slow, Member State-specific and difficult to predict. If the conditions for tax exemption are met, withholding the tax and refunding it afterwards is an unnecessary cost for the company.

Palta supports the aim of the Commission’s proposal to remove overlap between controlled foreign company rules (CFC) and the rules on global minimum taxation. Where a group falls within the scope of minimum taxation rules, a separate CFC analysis provides little added value in relation to the costs it causes.

The CFC exemption should be brought into force as quickly as possible, and the 50 per cent ownership threshold should be mandatory in all Member States. Finland should also highlight the need to continue simplifying minimum taxation rules and related reporting, because the Tax Omnibus and the amendments to the DAC Directive do not yet solve the heavy obligations arising from minimum taxation.

Palta also supports the proposed exemption of SMEs from the scope of CFC rules. Small and medium-sized enterprises have limited resources for specialised tax analysis, and the application of CFC rules can become disproportionately expensive due merely to the obligation to assess the matter. In practice, a company must assess whether the conditions for CFC rules are met even if the outcome is that no taxable CFC income arises. This increases costs, slows down internationalisation and may reduce willingness to make cross-border investments or establish operations in another Member State. The Commission also notes that there have been very few CFC cases involving SMEs in the Member States.

The exemption should be as clear as possible, automatically applicable and consistent with the EU definition of SMEs. If the exemption is built on overly complex conditions, it will not in practice reduce the administrative burden. Finland should support a model in which the CFC exemption for SMEs is genuinely usable and in which supervision by the authorities is targeted on a risk basis at situations where there is real evidence of artificial arrangements.

The EU-level R&D investment incentive proposed by the Commission is a welcome initiative from the perspective of competitiveness. The operating environment for EU companies is currently weakened not only by the volume of regulation but also by the fragmentation of Member States’ tax incentives. A common minimum level could improve predictability and support investments in research, development and productivity improvement.

According to the proposal, expenditure on machinery, equipment and other tangible assets used for research and development could be deducted immediately or over the following four years. Finland’s depreciation system (Business Income Tax Act 25 §) is more flexible than the proposed model. It must therefore be ensured that the new model would not in practice weaken Finland’s current depreciation model. 

If the incentive is targeted only at tangible R&D investments, its impact on service-sector and digital-economy companies will remain limited. Innovations in service companies are often based on software, data, algorithms, service development, processes, skills, business-model development and other intangible inputs. These investments should not be left outside EU competitiveness measures.

Finland should take a positive view of the R&D incentive, while seeking to ensure that its scope also supports investments in service sectors, digital solutions and intangible value creation. Otherwise, there is a risk that the EU-level incentive will focus on industrial and tangible investments and will not sufficiently reflect the investment structure of the modern service and data economy.

Article 4 of the proposal for a directive does not refer, in relation to the definition of R&D, to existing interpretative sources such as the General Block Exemption Regulation or the OECD Frascati Manual. Palta requests that the proposal clarify whether the incentive is based on the current established definition of R&D or whether the intention is to introduce a new EU-level definition. If the definition is opened or amended, Palta considers that the definition should at the same time be updated more broadly to reflect the development of digital and intangible value creation. The current OECD Frascati Manual dates from 2015 and, for example, does not mention artificial intelligence at all. This is a significant shortcoming in a situation where artificial intelligence, data, algorithms, software and other intangible inputs are key drivers of research, development and innovation activity.

Updating the definition of R&D also has an urgent competitiveness dimension. The EU has fallen behind key competitor countries in the development and commercialisation of artificial intelligence. At the same time, the EU is pursuing technological sovereignty, strategic autonomy and stronger innovation capacity of its own. These objectives cannot be credibly advanced if R&D tax incentives are built on definitions that do not recognise the key forms of investment in the modern digital economy and service business.

Palta considers it highly problematic that in the proposed R&D definition — “experimental development” as defined in Article 2, point -1a, of the ATAD Directive — experimental development is limited to new or improved products and processes, while services are excluded. In this respect, the proposed wording appears to differ both from the established definition used in EU State aid rules and from the OECD Frascati Manual. According to Article 2(86) of the Commission’s General Block Exemption Regulation, experimental development means, among other things, the following: “experimental development means acquiring, combining, shaping and using existing scientific, technological, business and other relevant knowledge and skills with the aim of developing new or improved products, processes or services”.

The OECD Frascati Manual 2015 also defines experimental development in Chapter 2 as follows: “Experimental development is systematic work, drawing on knowledge gained from research and practical experience and producing additional knowledge, which is directed to producing new products or processes or to improving existing products or processes.” However, Chapter 1 of the manual specifies that the definition of “product” also covers services: “This manual follows the SNA convention in which ‘product’ refers to a good or a service.”

Leaving out the concept of services would be a highly problematic limitation, particularly from the perspective of service sectors, the digital economy and AI-based development. R&D activity in service companies, as well as in industrial companies, is typically not limited to physical products or traditional production processes, but relates to new services, digital systems, software, data, algorithms, user experience, business models and service processes. If the EU-level R&D tax incentive recognises only products and processes, it risks narrowing the effect of the incentive mainly to industrial and tangible investments and leaving the key innovations of the modern service and data economy outside its scope.

Palta considers that any EU-level definition of R&D should at least correspond to the broader approach used in the General Block Exemption Regulation and the Frascati Manual, and that the definition should be updated to reflect the digitalised world. This is necessary to ensure that the R&D tax incentive supports EU competitiveness, the renewal of service business and the use of artificial intelligence throughout the economy on an equal basis.

Including R&D regulation in the ATAD Directive, which is aimed at curbing tax avoidance, is structurally problematic. Palta proposes that a separate directive proposal will be prepared for R&D tax incentives, with intangible investments, innovation activity and digitalisation also included in the scope. This would be a more coherent way to support EU competitiveness, the development of service business and growth based on intangible value creation. Global trade in services has grown more than twice as fast as trade in goods over the past decade. Technological development and artificial intelligence are further accelerating service innovation and service-driven economic and export growth. Service sectors generate 43 per cent of Finland’s GDP and one third of the value of Finland’s exports. Private service sectors, excluding retail and wholesale trade, employ more than 1.1 million people, or over 40 per cent of all employed persons in Finland. Finland should actively advocate incentives that support service business, including service business in industry.

Interest limitation rules affect companies’ investments and financing structures. In practice, restrictions on the deductibility of interest on bank loans, for example, have made investment financing more expensive across the EU. Palta therefore considers it welcome that the 30 per cent EBITDA threshold, the EUR 3 million safe harbour threshold and the group ratio exemption for capital-intensive sector which are highly leveraged for legitimate reasons, would be made mandatory for Member States. In Finland, it is important to assess the reform in relation to the current national interest limitation rules and to ensure that the EU-level change leads to relief rather than to new parallel national interpretations in practice.

From the perspective of corporate financing, it is also positive that third-party loans would be more broadly excluded from the interest limitation rule where the financing is used for the taxpayer’s own activities. However, the proposal’s position that centralised group financing would continue to fall within the scope of interest limitation rules is problematic. Intra-group on-lending is a common and efficient way for many companies to arrange financing, manage liquidity and negotiate better terms from external financiers, for example where a solvent parent company can obtain financing at a lower interest rate. If the exception for third-party loans is lost when funds are on-lent within a group, the regulation may undermine efficient and commercially justified structures. Group financing functions have been relocated outside the EU because ATAD regulation has increased the cost of investment financing. Easing the interest limitation rules for intra-group lending could help attract investments to the EU.

Palta also considers justified the proposal under which the interest limitation rule would not apply in situations where the taxpayer’s EBITDA falls significantly (over 50 %). A key problem with the current interest limitation rules is their timing: the rule may hit precisely when a company’s profitability weakens, its need for financing increases and continuing investments would be important for the economy. In such circumstances, the tax rule may at worst reinforce an economic downturn instead of targeting erosion of the tax base.

The relief concerning a sharp fall in EBITDA would also be important in service sectors, where fluctuations in demand, major external shocks and the timing of investments can affect results rapidly. If a company’s performance weakens temporarily, for example because of market disruption, a crisis or a rapid increase in cost levels, restricting the deductibility of interest expenses may weaken liquidity and make recovery more difficult. Finland should support the relief and ensure that the conditions for its application are clear, automatic and predictable.

Palta considers it problematic if the application of key relief measures were postponed far into the future. Reducing companies’ administrative burden is a current need from the perspective of EU competitiveness, and the realisation of the effects should not be delayed unnecessarily. In the negotiations, Finland should promote the entry into force of the changes as early as possible, while maintaining an administratively realistic timetable.

Implementation must also ensure that companies do not face new uncertainty during the transition phase. The rules must be clear, the application guidance consistent and the administrative procedures digital. In particular, Finland’s national implementation must avoid additional requirements that would undermine the benefits of EU-level simplification.